Revenue up, net margins down
Ag cooperatives struggle with lower prices, higher costs
By David Chesnick
USDA/RBSAgricultural Economist
Editor's note: A more detailed examination
of the financial performance of the top
100 U.S. farm cooperatives will be available
in late January at. www.rurdev.usda.gov/rbs/pub/newpub.htm
ith a few exceptions, most agricultural sectors continued to battle with lower prices and higher costs of production in 2000. Most cooperatives labored under these pressures. According to the just released "Farmer Cooperative Statistics, 2000" (RBS Service Report 60), published by USDA's Rural Business-Cooperative Service, total revenue for all farmer cooperatives increased 4.7 percent. However, net income was down 3.9 percent.
Business consolidation at the top continued in 2000. The volume of business conducted by the largest 100 cooperatives represents nearly 62 percent of the total gross business volume of all cooperatives, up from 58 percent in 1999. These major co-ops (which represent 3 percent of co-ops by number and a much larger percent by membership) also control 60 percent of the total assets of cooperatives.
The largest 100 cooperatives vary tremendously in the volume and type of business they perform. Their total volume of business ranges from $40 million to $12.3 billion. The types of businesses include manufacturing, farm supply sales, marketing and processing. In this report, the category in which a cooperative is included is based primarily on the type of commodity they market or process for their members. While more than half of the largest cooperatives sell farm supplies, only those that sell predominantly farm supplies will be included in that category. Some cooperatives are involved with several commodities and cannot be easily categorized. These cooperatives were classified as diversified cooperatives.
Operating revenue rebounds
Total operating revenue (which includes all farm supply and crop/livestock marketing sales and service income) earned by the top 100 cooperatives was up 7 percent (table 1) from 1999, to more than $70 billion. This gain reversed 4 years of declining operating revenue the same trend that held true for all cooperatives in 2000. Most top 100 cooperatives saw an increase in revenue in 2000, with 57 showing higher revenue (compared to 39 the year before). However, 69 percent of this increase was due to large gains made by three cooperatives.
Farm supply sales, which jumped $2.7 billion, were the main force driving revenue higher. Petroleum sales led the way, accounting for 83 percent of the total increase in farm supply sales.
For co-ops that process and market farm commodities and products for their members (referred to as "marketing cooperatives") the picture was mixed. Dairy, rice and sugar cooperatives all saw revenue decline despite higher production volume. But the increase in output could not offset lower prices. Most other types of marketing cooperatives fared better, resulting in an overall 4 percent increase in revenue for marketing co-ops as a group.
Overall, the cost of goods sold increased by the same amount (7 percent) as that of revenue. However, across commodity groups there were variations. For example, poultry/livestock cooperatives paid a higher percent of the increased revenue back to their members in the form of cost of goods sold. In 1999, 92 percent of their sales represented cost of goods sold. By 2000, that same percentage reached 94 percent. On the other hand, fruit/vegetable cooperatives had lower cost of good sold despite having higher revenue.
Gross margins continue upswing
Gross margins increased by the same proportion as sales and cost of goods sold. Gross margins were up 7 percent, to $6.9 billion from 1999. Every commodity group but poultry/livestock showed an increase in gross margins. As explained above, poultry/livestock cooperatives increased their payments for their members' products by more than the increase in sales, thus lowering their gross margins. This represents the second year in a row the top 100 cooperatives ended their year with higher gross margins.
Operating expenses jumped 5 percent in 2000. Leading this increase were cotton cooperatives, with a 30 percent increase in expenses. Next were dairy co-ops, with a 10 percent jump. Farm supply and sugar cooperatives had lower operating expenses in 2000 compared to 1999. Most of the farm supply decline was due to the restructuring of a few cooperatives while all the sugar cooperatives showed lower expenses. All other commodity groups showed a moderate, 5-percent increase in their operating expenses.
For those cooperatives reporting labor expenses, total wages and benefits increased 6 percent. Reported labor expense represents 50 percent of total operating expense, which was similar to 1999.
Net operating margins bounce back strong
Net operating margins have been declining since peaking in 1995. However, 2000 showed a remarkable reverse in that trend. Net operating margins for the largest cooperatives jumped 25 percent, to $933 million. But not all commodity groups fared well. While cotton, poultry/livestock and rice cooperatives had lower net operating margins, most of these lower values resulted from a single cooperative within each sector.
Most of the other commodity groups had mixed results, with the majority having higher net operating margins. Farm supply and sugar cooperatives showed the largest turnaround. This was mostly due to better control of operating expenses.
Higher margins don't equal stronger bottom line
Despite what appears to be higher margins from operations, other revenues and expenses pushed down over-all net margins to the lowest level since 1986. Interest expense jumped nearly 15 percent in 2000, to nearly $750 million. This was due mostly to a higher amount of debt, which reached a record of more than $10 billion. Dairy, diversified, fruit/vegetable and farm supply cooperatives were most heavily involved with debt financing. These groups hold 75 percent of the debt of all cooperatives, while representing 54 of the largest 100 agricultural cooperatives.
Interest income was up 22 percent in 2000. However, nearly 50 percent of that increase was due to two poultry/livestock cooperatives. Other income and expenses include rental income, gain/loss on the sale of fixed assets, income or losses associated with joint ventures or unconsolidated subsidiaries. These income/expenses are generally not related directly to cooperative operations. Other income that helps cooperatives with their bottom line fell 32 percent while other expenses jumped 128 percent. The cumulative effect pushed down these other revenues/expenses to $124 million, a decline of 61 percent. Only grain and cotton had higher revenues from these other sources.
Patronage refunds received by the largest cooperatives continued to fall and reached the lowest levels since 1988. Total patronage refunds received by the largest agricultural cooperatives was $35 million in 2000, a 31 percent decline from the year before. These refunds include patronage from both cooperative banks and other cooperatives. Every commodity group reporting patronage refunds showed a net decline.
The net effect of these non-operational activities pushed down net margins to $455 million. This 14 percent drop in net margins was the lowest level since 1988. Higher interest expense coupled with declining revenues from joint ventures were the main cause in continuing declining net margins for 2000.
Dairy cooperatives as a group had the largest net margins, accounting for 47 percent of the total top 100 cooperatives. They were followed by the diversified cooperatives, with 29 percent of the net margins. Farm supply, poultry/live-stock and sugar cooperative commodity groups ended the year with net losses.
Despite lower margins, member patronage climbs
Members received higher patronage refunds in 2000 (as measured both by higher percentage of net margins and absolute value). Despite lower net margins, members received $88 million more than in the previous year, a 28 percent increase. Eighty-eight percent of total net margins were returned to members as cash and allocated equity. This compares to 60 percent in 1999. All commodity groups allocated patronage to their members, with the exceptions of fruit/vegetable and sugar cooperatives.
If cash is king, then members should be feeling better in 2000. Forty-five percent of net margins were paid out in cash in 2000 compared with 32 percent the prior year. That equates to a 21 percent increase in cash payments in real dollars.
Dividends paid also increased 11 percent, to $50 million. With the exception of sugar, all commodity groups paid cash to their members. Despite net losses, farm supply and poultry/livestock cooperatives deducted from their unallocated equity to return cash back to their members. Only three cooperatives use non-qualified, non-cash patronage refunds.
Due to the combined effect of lower margins and higher allocations, unallocated equity actually was negative in 2000. In other words, unallocated equity was used to cover loses and allocation shortfalls.
As a whole, the largest cooperatives also ended the year with a tax benefit. Twenty-five cooperatives had tax benefits in 2000 totaling $93 million. This compares with a total tax liability for the other 75 cooperatives of $79 million. While some of the tax benefits were due to net losses, seven cooperatives received a benefit by allocating unallocated equity back to members.
Assets continue to expand
Total assets for the top 100 co-ops grew 4 percent in 2000 (table 2).
Leading the increase were current assets, which increased $591 million, to $14 billion. Almost all of that growth came from inventory accumulation and higher accounts receivable. In a stagnant economy, increases in these accounts can prove to be troubling.
The accounts receivable turnover ratio dropped from 17.5 to 16.8 in 2000. This indicates that accounts receivable are growing in relation to sales revenue. The inventory turnover ratio increased from 49.8 to 55.1, showing that inventories were not expanding faster than sales.
The majority of inventory and accounts receivable accumulation occurred in diversified, fruit/vegetable and farm supply cooperative sectors. The fruit/vegetable group accumulated the most inventories while diversified cooperatives accounted for the largest increase in accounts receivable.
Investments also jumped, increasing 8 percent, to $4 billion. While the cooperatives increased their investments in non-cooperatives, the majority of the increase was investments in other cooperatives. This includes both cooperative banks and other cooperatives. Investment in non-cooperative enterprises also increased $124 million. Diversified cooperatives led the increase in investment in other cooperatives while poultry/livestock cooperatives had the greatest increase in non-cooperative investment.
Fixed assets increased 1 percent, to $8.7 billion. Farm supply, poultry/livestock and sugar were the only commodity groups to decrease the amount of fixed assets held.
Higher current debt boosts total liabilities
Total liabilities increased $897 million, up 10 percent from 1999. All of this increase was due to a jump in current liabilities. Short-term debt was up $454 million in 2000, with most of the increase coming from commercial banks. Current portion of long-term debt fell due to lower interest rates and declining long-term debt. Cooperative banks provided cooperatives with the largest source of working capital. However, commercial banks are increasing their cooperative loan portfolio.
Cooperative bank loans increased 2 percent, to just over $1.3 billion. Most top 100 co-ops have grown to the extent that they have exceeded the lending limits of cooperative banks and are thus doing more supplemental borrowing from private banks. Fruit/vegetable and grain co-ops continue to rely heavily on cooperative banks for operating loans. The other commodity groups are relying more on commercial banks as those loans jumped 42 percent, to just under $1.3 billion. However, large diversified cooperatives accounted for 60 percent of the increase in borrowing from commercial banks. Bank loans, both cooperative and commercial, accounted for the majority of cooperative short-term financing, with 70 percent of the total short-term debt. The exceptions are cotton and sugar cooperatives. Cotton cooperatives balanced bank loans with commercial paper as sources for working capital. Sugar cooperatives relied on government sources to provide more than half of their total short-term debt.
Accounts payable dropped 3 percent, to $3.6 billion. Liabilities owed to members jumped 16 percent, to $2 billion. These member liabilities include cash payments, dividends and revolving equity (which has been declared but not yet paid), pooling payments and other member credits. However, 50 percent of the total increase was caused by a single cooperative.
Total long-term debt less current maturities dropped by 2 percent, to $6.3 billion. Most of the decline is attributed to diversified and farm supply cooperatives. Cooperative banks and debt issued by the cooperative accounted for 77 percent of total outstanding long-term debt. Cotton, fruit/vegetable and grain cooperatives relied heavily on cooperative banks for long-term funding. Diversified, dairy and rice cooperatives relied more on issuance of bonds and other notes to finance their long-term needs.
Despite lower margins, equity hits new record
Total equity grew 2 percent in 2000, with the largest cooperatives ending their fiscal year with a record $10 billion in total equity. Member equity that includes member certificates, preferred and common stock increased by 3 percent. On the other hand, unallocated equity fell by 3 percent. As was mentioned earlier, lower margins and higher payments to members brought about a decline in unallocated equity.
Performance measurements continue downward slide
The average performance measures for all 100 cooperatives continued to show deterioration over the prior years. The tools developed to analyze the cooperative's financial information include several performance measurements or ratios. These measurements are standard ratios found in most financial textbooks. A list of average ratios for all cooperatives and by sector group is presented in table 3.
The current and quick ratios examine cooperative liquidity. Both ratios show that the average cooperative liquidity eroded over the prior year. The current ratio fell from 1.40 to 1.37 between 1999 and 2000. The quick ratio fell from 0.78 to 0.76 during the same period. The main cause for declining liquidity was lower cash flows from operations and the need for cooperatives to acquire working capital loans to help fund operations.
Leverage ratios show the risk associated with financing and cooperatives' ability to meet their long-term and short-term obligations. The debt-to-asset ratio illustrates how assets are financed. In 2000, the debt-to-asset ratio was 0.61, up slightly from 0.60 in 1999. Examining long-term financing, we focus on the long-term debt-to-equity ratio. This ratio increased from 0.6 in 1998 to 0.61 in 2000, raising the level of risk.
What the combined effect of higher liquidity and stable leverage ratios
illustrates is the change in the term structure of the debt. In other words, cooperatives appear to be shifting their debt loads from long-term to short- term. Expansion of fixed assets slowed down while the need for working capital increased. Short-term financing bridged this working capital need.
While leveraging a cooperative is not necessarily a bad thing, it does put more risk on the business. The biggest risk comes from cooperatives defaulting on their loans. An examination of the times-interest-earned ratio provides a quick look at that scenario. It looks at the number of times interest expense is covered by net margins with interest added back in.
This ratio fell from 4.7 to 3.3 in 2000, the lowest level in the past 5 years. While there is no current crisis, the leverage ratios point to a situation where cooperatives are leveraging themselves to fund operations while the revenues from those operations continue to shrink.
Activity ratios look at how well the cooperative uses its assets. Cooperatives are finding activity ratios holding steady. Local-asset-turnover (calculated by taking total revenues divided by local assets) was constant at 2.7 in 2000. This represents how much revenue is generated by each dollar invested in local assets. Local assets are total assets less investment in other cooperatives. Fixed-asset-turnover increased slightly from 14.3 to 14.4 in 2000. Activity ratios indicate that cooperatives slowed down on their investment in fixed assets. They instead invested, either voluntarily or involuntarily, in accounts receivable and inventory as their total revenues increased.
Profitability ratios, while not an absolute indicator of fiscal health, do nonetheless provide a view of financial strength for a cooperative. Gross profit margins jumped from 15.9 to 16.5 in 2000, continuing an upward trend ongoing since 1996. However, net operating margins have been falling during that same time, falling from 1.6 in 1999 to 1.3 in 2000. This would indicate some inefficiency in handling the higher volume of sales.
Return on total assets (calculated as net margins plus taxes and interest expense divided by total assets) fell from 4.5 to 3.7 in 2000. This ratio focuses on the operation itself without respect to how the cooperative was financed. This reflects lower efficiencies in the use of the cooperative's assets in generating net margins.
Return on member equity is a ratio that looks at the return on member investment after all expenses have been deducted, including taxes and interest. After increasing for a few years, the return on members' equity dropped from a high of 13.8 in 1998 to 9.4 in 2000.
Are co-ops ready to face the future?
Facing a slow world economy at present, the agricultural sector will continue to experience lower exports. The surplus of agricultural goods built up over the past few years will keep prices in check. Yet, domestic demand should remain healthy and keep prices for out-put somewhat buoyant. Costs related to inputs should climb, resulting in lower margins for farm supply goods.
Tighter credit standards will pinch cooperative financing and lead to lower margins. Overall, the agricultural economy will shadow that of the total economy. Other industries will have to tighten their belts and control costs, and so must cooperatives.
Mergers, consolidations and joint ventures will, in all likelihood, continue to provide cooperatives a cheaper means to access new markets. Adjustments in operations to lower costs will be driving many decisions in board meetings and executive offices. Hopefully, cooperatives will be able to adapt to the changing environment and continue to provide member benefits and position themselves for the future.
